Q2FY13 is expected to be another quarter of weak growth, with Sensex companies expected to post ~4% YoY growth and our coverage universe’s (ex-OMCs) earnings growth coming in at ~9.0%. Overall revenue growth of 14.6% YoY is expected for the coverage universe (ex-OMCs) and 12.7% for Sensex companies (with 13 companies posting >20% growth). The Sensex universe’s EBITDA margins are expected to decline ~239bps, to 17.8%. INR appreciation and reforms initiated by the government in the latter half of Q2FY13 are expected to impact companies with a lag and benefits of the same should accrue in the ensuing quarters.
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Another quarter of tepid earnings
Q2FY13 earnings growth is likely to be weak, with Edelweiss coverage universe (ex-OMCs) expected to post 9.0% YoY growth and flat QoQ growth. Meanwhile, growth for Sensex companies is expected to be ~4%. The growth is mainly driven by strong growth in Pharma, IT, BFSI and cement. Overall, in the Sensex universe, 10 companies are expected to post YoY earnings decline. We believe the impact of INR’s appreciation and reforms initiated by the government should be visible on earnings of companies in the ensuing quarters.
Revenue and margins still facing the heat
The revenue trajectory continues to be weak with top line growth expected to be ~14.6% for the coverage universe (ex-OMCs) compared to 18.3% in Q1FY13 and 20.9% in Q2FY12. Among major sectors, while IT and pharma are expected to post healthy top line growth, metals, construction and real estate continue to register relatively slower growth. For the Sensex universe, growth is expected to be 12.7%, with major surge coming from IT and auto (Mahindra & Mahindra and Tata Motors) while Bajaj, Hero MotoCorp, ONGC and Tata Steel are expected to post negative or minimal growth. EBIDTA margins are further expected to decline 120bps YoY to 17.7% for our coverage universe (239bps YoY to 17.8% for Sensex) with telecom, metals and real estate acting as major drags. We believe, with cost rationalisation efforts undertaken by India Inc. margins are beginning to bottom out at 17-18%.
Earnings outlook: Downgrades to be muted
Earnings continue to be downgraded, with FY13E Sensex EPS being cut ~1% during Q2FY13, for both consensus and Edelweiss (Edelweiss EPS estimate at INR1,251 and consensus at INR1,260). However, the pace of earnings downgrade seems to have slackened compared to the beginning of the year. Based on the macro assessment we believe that the beneficial impact of INR appreciation and government’s reforms should be visible in the ensuing quarters.
Regards,
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